Court: District Court, E.D. California; October 30, 2014; Federal District Court
Plaintiffs filed a class action lawsuit against Carter Brothers Security Services, LLC, and related defendants, alleging violations of state and federal labor laws, conversion, and breaches of California’s Unfair Competition Law. They seek damages, restitution, civil penalties, and injunctive relief due to being misclassified as independent contractors instead of employees under an Independent Contractor Agreement. Plaintiffs contend that Carter Brothers knowingly entered into these Agreements to evade labor laws and that they were fraudulently promised conversion to W-2 employee status, which did not occur.
The Agreements included unconscionable terms, such as non-competition clauses and restrictive dispute resolution provisions. Plaintiffs aim to have these Agreements rescinded as invalid and unenforceable. They argue that, despite the Agreements, they functioned as employees since their work schedules were dictated by both Carter Brothers and AT&T, they used company vehicles with AT&T branding, and were required to wear AT&T uniforms. Furthermore, they had no ownership in their work and were obligated to provide their own tools, contrary to promises made by the defendants. The court denied motions from Carter Brothers to compel arbitration and to dismiss or transfer the case to Georgia.
Class Members were mandated to undergo a two-week initial training session and participate in ongoing training organized by Carter Brothers and AT&T. Their work was closely supervised by both companies. Carter Brothers filed two motions: the first seeks to compel arbitration and dismiss the case based on the Agreement’s alternative dispute resolution terms; the second requests the transfer of the case to Georgia pursuant to the Agreement’s forum selection clause and seeks dismissal or a stay pending arbitration. The Court denied both motions, determining that the Agreements were unconscionable and thus unenforceable. Consequently, the motion to compel arbitration failed, and the request to dismiss or transfer the action also failed.
The Federal Arbitration Act (FAA) mandates the enforcement of valid arbitration agreements and allows a party to seek court orders for arbitration when another party refuses. A court must determine if a valid arbitration agreement exists and if it covers the dispute in question. If both are established, the court must compel arbitration. In assessing the existence of an arbitration agreement, courts utilize state law contract principles while recognizing federal arbitration policy. Although arbitration agreements cannot be invalidated based solely on state law applicable to arbitration, general contract defenses like fraud, duress, or unconscionability can render arbitration agreements unenforceable, provided such defenses do not undermine the arbitration process.
Doubts regarding the scope of arbitrable issues should favor arbitration, including issues related to contract interpretation or defenses like waiver or delay. Arbitration should only be denied if there is clear assurance that the arbitration clause does not encompass the dispute. A choice of law provision in an agreement is generally upheld unless it conflicts with a fundamental policy of California law. In this case, Georgia law applies due to a substantial relationship with the parties, as Carter Brothers is based in Atlanta. However, Georgia’s classification of plaintiffs as independent contractors contradicts California's public policy aimed at protecting workers, since the plaintiffs worked, resided, and signed agreements in California. Therefore, California law is deemed more appropriate for adjudicating this matter.
Carter Brothers seeks to compel arbitration based on valid agreements, asserting that the plaintiffs entered into these agreements without fraud or coercion. Federal courts apply state law principles to assess the validity of arbitration agreements. To determine if an arbitration contract is unconscionable, the court must first establish if it is an adhesion contract.
A contract is deemed adhesive when one party has significantly more bargaining power, leaving the other party with no option but to accept its terms or reject the contract entirely. For a court to consider such a contract unenforceable due to unconscionability, both procedural and substantive elements must be present. The procedural element examines factors like "surprise" and "oppression," while the substantive element assesses if the contract leads to "one-sided" or "overly harsh" outcomes. These elements do not need to be equally present; a sliding scale approach allows for greater emphasis on one element if the other is less pronounced.
The validity of arbitration provisions within contracts is subject to initial court determination, and if deemed valid, only the remaining parts of the contract may be evaluated by an arbitrator. In this case, the contract in question was a standard-form adhesion contract created by Carter Brothers, which left the plaintiffs with no negotiating power. Consequently, the court must further assess if the contract is both procedurally and substantively unconscionable.
Procedural unconscionability pertains to how the contract was negotiated, focusing on oppression and surprise. Oppression arises from a lack of bargaining power and genuine negotiation, while surprise involves unclear or hidden terms. Testimonies from the plaintiffs indicate they were compelled to sign the agreements as a condition of employment, affirming that refusal would result in loss of job opportunities.
A contract of adhesion is identified as a form of procedural unconscionability per the Ninth Circuit in Flores v. Transamerica HomeFirst, Inc. As a result, the procedural element of unconscionability is satisfied. The substantive element evaluates whether the terms of the agreement are excessively one-sided. Specific provisions regarding arbitration, non-competition, and governing law are highlighted as notably biased. The arbitration clause requires plaintiffs to travel to Atlanta, Georgia, cover half the arbitration costs, and consent to jurisdiction in an unrelated venue, without notifying them that binding arbitration waives significant rights, including the possibility of class arbitration. The financial burden on plaintiffs, including travel and arbitration costs, may exceed their wage claims, further exacerbated if they do not prevail, as they may be liable for half of the arbitration costs. The arbitration clause fails to offer an accessible forum for plaintiffs to assert their statutory rights, echoing findings in Shankle v. B-G Maint. Mgmt. of Colorado, Inc. The non-competition provision, which restricts plaintiffs from competing in the same market for one year post-termination, is deemed excessively harsh and violates California law (Cal. Bus. Prof. Code § 16600). Additionally, if plaintiffs are classified as employees, the indemnification clause contradicts California law (Cal. Lab. Code §§ 2802, 2804) by attempting to waive the employer's obligation to indemnify for necessary expenses. Overall, these terms are substantively unconscionable as they disproportionately favor the defendant, Carter Brothers.
Under California law, a contract is unenforceable if its central purpose is illegal. The California Supreme Court has emphasized that if a court cannot separate lawful from unlawful aspects of a contract, the entire contract becomes illegal and unenforceable. In this case, the Court aligns with the Plaintiffs' view that the Agreements are designed by Carter Brothers to circumvent employment taxes and benefits, thus providing an unfair competitive advantage. Such Agreements, which aim to exempt parties from legal obligations, contravene public policy and cannot be enforced. Consequently, the Court denies Defendant’s Motion to Compel Arbitration, as well as the motion to dismiss or stay the action based on the Agreements' arbitration provisions. Additionally, the finding of the Agreements as unconscionable renders Carter Brothers' subsequent motion to dismiss or transfer venue irrelevant, resulting in its denial as moot. The matter was submitted without oral argument, relying on the written briefs.
